Fund Managers Covet These Cheap Stocks

Last week's stock market slide was fueled by hedge funds' indiscriminate selling to raise cash.

But as these players rushed to unload anything liquid in their portfolios, some mutual funds have been scooping up the resulting bargains.

"I think most managers have been buyers in this correction," says Larry Puglia, the portfolio manager of the $11 billion T. Rowe Price (TRBCX Quote)Blue Chip Growth Fund (TRBCX). "Earnings growth prospects for many companies are still quite sound, and the valuations have gotten more attractive."

Few mutual fund managers have the leeway to sell all of their holdings and move into cash, so their stock-picking skills really come to the fore during market crises like this. That's particularly true for managers who elect to lighten up on some stocks to make room for others.

Jeff Tjornehoj, senior research analyst at Lipper, says investors, particularly large institutional accounts, use mutual funds to play a particular role in their portfolio, and so prefer that they stay fully invested. "Investors also want to see them make an effort to make money rather than take the know-nothing route and park it it cash," he adds.

Here's a look at where four fund managers see bargains.

Puglia looks for companies with free cash flow growth, leading market position, seasoned management and strong fundamentals, especially a high return on invested capital. If a company's fundamentals remain strong, he's willing to keep buying on the way down, on the theory that his costs will average out over time.